The loans on tens of thousands of homes are going bad. 36,000 mortgages are in arrears of three months or more. This is before we look at the shadow arrears that are occurring where people stay solvent only by eating into their savings, or where they have taken interest-only loans as a method of staying afloat. It also doesn't fully factor in the 17,000 households that cannot pay their mortgage and who are receiving mortgage interest supplement.
Everyone knows this. No one is doing anything about it. Banks have been exercising heroic levels of forbearance for primary residences in particular. Their failure to recognise the scale of these potential losses is not because of any social conscience, or even because of any government intervention on citizens’ behalf. The banks’ already-weakened balance sheets will get hurt badly if you lose your home, and they can’t have that. The banks’ forbearance is really for themselves. We need to begin thinking about ways to reduce the debts held by ordinary people, who bought beyond their means because they were offered credit by professionals who should have known better. We also need to consider the costs and benefits to society of debt-forgiveness.
Everyone from the Financial Regulator to the staff in RTE to my mother will cry ‘Moral Hazard!’ when talking about bailing out homeowners who signed their names to forms and borrowed money they couldn’t pay back. Moral hazard is a widely misused term. Moral Hazard exists when I behave differently when I know I’ll get bailed out if I fail. The argument goes that bailing out those who took out too much money for their homes constitutes moral hazard, because it encourages them to borrow more again later. The logic of this argument logic is flawed in several ways. First, even if it were true, the Irish economy has already been pumped full of moral hazard because of the bailout of Ireland’s banks and bankers, almost all of whom, critically in middle management, and unbelievably, given the scale of their failures, still have their jobs. Second, the moral hazard existed at the point of sale--the bank selling the mortgage had more information about the likely evolution of the market, the debt-profile of the individual taking the loan, as well as the guidelines of their code of best practice, as well as the historically low levels of interest, to know that the person getting the loan was a bad bet. But the banks took the bet anyway. Recent research has shown that rising house prices were driven predominantly by increases in the size of mortgages that banks were willing to give, meaning the banks were the engine of the housing bubble, not interest rates or population. The average person just wanted a house to live in.
Third, the worry is that these bailed out homeowners would start taking out more debt, thinking they’d be bailed out again. Think about this for a second from your own point of view. Say a bailout happens for you and your wife with a 600,000 euro mortgage on your home. Say through some mechanism the bank forgives 200,000 euros of the mortgage, you keep your home, and you continue to pay a reduced amount to the banks. You and your wife have spent probably two years getting letters and phone calls from banks and solicitors, you’ve gone through the stress of nearly losing your home. A note about the debt forgiveness exists on your credit record. You are not going to start running up debt again, and even if you’d like to, you’ll be stopped. The moral hazard argument is flawed and useless. We should discard it.
The real argument against bailing out homeowners is the effects on the mostly-nationalised banks, and by extension the Irish taxpayer, of any bailout of indebted households. The Irish taxpayer owns a fairly large amount of most of the banks, and these banks would have to come back to either the international markets or the government for funding to stay alive.
The Irish taxpayer has to borrow to foot the bill to bailout those who borrowed excessively in the boom via further injections of capital to the banks.This is a bad thing. Fully cleansed, functioning banks, homeowners taken out of substantial negative equity and consuming and investing again, and a clear signal to the markets that Ireland has put its house--no pun intended--in order, may be worth it.
Following intense public debate, and serious scrutiny, if the benefit exceeds the cost in terms of encouraging economic growth--not to mention all of the ancillary social benefits of a large swathe of Irish society out of debt--then we should consider implementing a scheme of debt forgiveness.